Corporate character is not just a legal construct

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Companies have no immortal soul but live and die like human beings – prosperous by the attributes of their personality. This week, John takes discusses the many faces of corporate personality.

Can an organisation learn or forget? Can it have integrity or lack it? Can it laugh or be angry? Does a company have a soul? The film and book of The Corporation degenerate into tedious rants against modern business, but they raise a serious issue. Is there such a thing as corporate personality?

Treating companies as if they were people is not simply a conceit of management gurus. Some people ascribe the concept of corporate personality to the Supreme Court, which determined in 1819 that Dartmouth College was an entity distinct from its current members. During the 19th century, judges and legislators elaborated this idea. The modern company can sue and be sued; its assets and liabilities are its own, not those of the people who manage or invest in it.

But can a company have thoughts, knowledge or intentions? The British government proposes to create an offence of corporate manslaughter. The definition of this crime, however, rests on the ability to make analogies between the behaviour of a business and that of an individual. What does it mean to say that an organisation was negligent? Is it possible to ascribe a state of mind to an abstraction?

Many economists and business people think this anthropomorphisation of the company is sentimental tosh. A company is a nexus of contracts defined by its charter or articles of association. Lawyers have tried to resolve the issue in a different way. They search for a “directing mind”, whose thoughts and desires can be detected in everything the organisation does. Many chief executives would happily cast themselves in the role of directing mind, and business journalists often write as though everything that happened at General Electric happened because Jack Welch willed it.

But neither the nexus of contracts nor the directing mind describes the reality of modern corporate life. If a business was no more than a nexus of contracts, you could establish an equally successful business by reproducing the nexus of contracts. You cannot, because an effective organisation relies on the social context surrounding its nexus of contracts. Customers might put their trust in contracts but generally prefer to rely on the reputation of the business and to deal with people they know. Workers may aspire to be part of a profitable nexus of contracts, but also look for a working environment in which they can take pride.

The personalisation of large companies is equally mistaken. Mr Welch was the product of a management system that ensured the chief executive of General Electric was always the most admired chief executive in America; that shows it is the company, not the individual, that really matters. The successful business is necessarily more than an aggregate of agreements or people; just as the unsuccessful business is less than the aggregate of agreements or people.

The issue of corporate manslaughter arises precisely because sloppy businesses, such as Railtrack, have no directing mind: their failures were not the product of bad people, but of an arrogant and complacent corporate culture. In the truly dreadful organisation, everyone has positioned themselves not to be responsible when something goes wrong. The horror of Enron was not just that it was home to some corrupt people but that the environment encouraged their corruption.

So in both good and bad companies, corporate personality is a commercial reality, not just a legal construct. And if the company has its own distinctive character, like an individual, that refutes the claim that the company is necessarily amoral, that it has no ethics, only interests. This is the one nice point made in The Corporation: a personality devoid of moral sense, which is instrumental in its treatment of stakeholders, generally would be diagnosed by psychologists as psychopathic. Society punishes psychopathic personalities, through social ostracism and imprisonment, and it punishes psychopathic companies through the market and political action. That was the fate of Enron and Andersen, IG Farben and Japanese zaibatsu. Companies have no immortal soul but, like human beings, they live and die. While they live, they prosper by the attributes of their personality.

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